Socioeconomic and Political Determinants of Public Spending Allocations: A Panel Data Analysis of Aggregate and Sectoral Spending

Abstract

A well-established segment of economic literature argues for an efficient allocation of resources to overcome poor growth performance, poverty, and inequality. However, the resource allocation response towards these economic issues varies across countries. Based on their respective socio-economic and political fabric, countries set priorities and accordingly allocate the available resources towards different sectors of the economy. The sectoral allocation of the available resource pie has repercussions for various economic variables like growth, poverty, and income inequality. In this context, this study contributes to the existing literature on the subject in two ways. First, this study aims to assess the factors that determine overall public spending across economies by focusing on socio-economic, political, and institutional factors. Second, the study examines the role of those factors in determining health, education, infrastructure, and defence spending. The study uses the panel data of 104 countries for the period 1990-2016 and employs FE-IV method to conclude that bureaucratic quality, democratic accountability, internal conflict, external conflict, government stability, and military involvement are the main institutional and economic variables determining public spending allocations at the aggregate and sectoral levels.